MarinBrit

Dear All,

Here's an interesting problem for you to comment on.

The Background.

Wife & I Bought House Back in UK in '96.
Offered Job In US + ended up over Here in '98
Started renting ("we'll only be here a few years ....")

Here we are in 2013, Both Green Card Holders, still renting in US, but situation in UK meant we thought about selling in UK, until US CGT Tax obligations were spelled out to us.

Current Assumptions.
Non-UK Resident - So my understanding is no UK CGT on sale while non-resident
US Resident = CGT on Sale. CGT = 20% Federal, say ~10% CA = ~30% = North of $150K . Ouch.

Options - based on my current understanding - please tell me if i'm wrong

1) Sell the house, take the hit - would prefer not to.

2) Don't Sell the house - no CGT. Status Quo - doesn't help.

3) One way Trip to the UK. Leave US before End of US Tax Year. Become non US -Resident ( round world cruise / 3 Months in Australia ... ) Sell House in UK, as Non US Resident, Non UK Resident = No CGT. Move Back to UK.
End up with Money, but in "Wrong" Country with no easy way back .

4) The CGT Shuffle.
Get US Citizenship.
Go Back to UK and live in House for 2 Years to Gain $500K US CGT personal exemption (while becoming UK residents again).
Leave UK prior to Start of UK Tax Year. Return US as US Citizens.
Sell House in UK in (next UK) Tax Year while Non UK Resident.
Do not Return / Become UK resident for Next 5 UK Tax Years.

So now at the point of sale (within 3 years) , we can exempt $500K CG - eliminating $150K in US Tax we would have otherwise paid.
And as UK Non-Residents not Pay CG in the year of Sale - and by not returning for 5 years avoid future liability.

The UK Residency / Non residency would occur under the new SRT regs - hence the no UK Resident for 5 years - if I've read / understood it correctly.

So Have got this right? is 7+ years of limitations worth it?.
Or can you tell me where + why I'm wrong, so I can abandon 4) now?
I know accountants who understand the US side of things, but are ignorant of the UK side of things.

Anybody who understands both sides, or who can point me at someone who does? I'd want to get this right before I commit to a course of action.

#firstworldproblems I know, and the recent slide of the GBP vs the USD hasn't helped ...

Thanks in advance

G

RICH

Hi and welcome

I have no expertise so offer no advice, but that was a lot of information for a casual observer to read and comment on.

Boil it down to a simple question if you can, which might help to open a discussion on your specific issues.

MarinBrit

Thanks for your comment Rich.

The above gives some background, alternatives considered, and explains my motivation.

If I were to try and simplify the above into a Single question it would be the core of 4)

Under UK SRT, could I return to the UK for 2+ years, Live in UK House, Then Leave, Selling the house within 3 years, while Non UK Resident, and be Exempt from UK CGT?

Does that help?

G

ian-mstm

You may prefer not to... but given the other choices you're considering, it's the least complicated. The question to ask yourself is whether or not you intend to return to the UK to live. If you do, then #2 is your best choice; if not, sell the house and take the hit.

From where I sit, choice #1 and #2 are the easiest... and the rest seem totally convoluted.

Ian

Michael

I see a major problem with number 4 if you are planning to purchase a home in the US. By the time you complete the sale, home prices and interest rates will likely have risen significantly making it no better than taking $150K hit now.

I assume from your name that your are in Marin county CA and if that is the case, California home prices around major cities bottomed out about at the end of 2011 and have risen about 25% since then.

http://www.sfgate.com/realestate/art...nt-4129561.php

Pulaski

Sorry Rich, that is not correct for a tax related question where knowing all the details is essential, because a small detail can totally change the advice/ preferred outcome.

JAJ

Hopefully you have declared the rental income on your U.S. and CA tax returns ...


May be the simplest approach. Note that if you're planning to move to a state without an income tax, you probably could (legally) avoid the 10% for CA by moving to that state, then selling. However, as far as I know you have to take specific steps to sever CA residence.

If you stay in CA, note that your increased CA state tax may be deductible on the current or next year's federal return, although you should do some tax planning to ensure that Alternative Minimum Tax doesn't impact this any more than necessary.

Also, if you sell the house, you should be able to write to HMRC and ask not to complete any further U.K. tax returns (if you have no other U.K. source income). This will simplify your life a little.

One of the legal ways to get around CGT in the United States is to hold onto the asset until you die. HOWEVER, this asset is in the United Kingdom and not only would require a probate process, but also as a U.K. situate asset would be liable to Inheritance Tax if over the nil rate band.

In addition - you should be considering whether you have lost your U.K. domicile for Inheritance Tax purposes. Getting Green Cards is a good start, but you also should be looking at purchasing a home in your new country and becoming citizens of that county. Divesting of U.K. assets also shows a strong intent to lose domicile, and has the added benefit of ensuring your wills (hopefully you have CA wills) do not require a U.K. probate. In that case, the question of your domicile and Inheritance Tax is unlikely ever to be asked.




As Green Card holders you are subject to U.S. federal tax no matter where you live, so this won't work - unless you are planning to expatriate and turn in your Green Cards. Even then, long term Green Card holders who expatriate have to pay certain tax penalties, including an unrealized capital gains tax (although there are some exceptions).


Sounds legal from a U.S. point of view. At least from a tax perspective. You would need to check if CA has any special rules on this kind of income or whether they follow the federal rule. From an immigration point of view, you would have a strong risk of losing your Green Cards. It would be much less risk to do this if you were U.S. citizens.

However you would have to factor in the expense of moving, impact on your careers, and the state of the real estate market in CA when you return. The overall cost could easily exceed $150k.

Also - and you would need a U.K. tax adviser to work all this through, you would be re-establishing U.K. residence again, it may be harder to lose U.K. tax residence in future (under the new rules) and you may also have greatly complicated any plans to become non-domiciled. In addition, you would need to carefully work through the U.K. principal private residence rules and would also be exposed to risks of the U.K. housing market and the currency in this period of time.

Practically - it doesn't sound like it would work for 99% of people.

Bob

There is another option.

Can of gas and matches and claim the insurance.

Wouldn't necessarily recommend it mind, but welcome to BE

MarinBrit

Hi Ian,

I agree, #1 and #2 are "easiest".
When I asked my wife, could she tell me where she wants to end her days, US or UK? She couldn't given me a yes/no answer, so that makes planning harder than it could be.

#3 + #4 are my reaction to otherwise having to write the biggest check I'd ever written - to the tax authorities.

$150K would buy a lot of toys.

MarinBrit

JAJ,

Thanks for your Insight.

Considered The other States approach (e.g. NV, FL), but CA seems "Sticky" in that respect.


You are correct that #4 is disruptive, and carries associated risks,
and as Michael points out plenty can happen in 3 years to mess with current assumptions (tax law, exchange rates, property markets, etc).

and all for "only" $150K reward.

I'm still trying to get my head around having to hand over such a large wedge of cash, that I hadn't anticipated. Thinking, naively perhaps, that it was "our" house, not the governments.

Maybe I should try thinking more glass half full, than glass half empty.

It's good to get other peoples perspective on this matter.

I hate to disappoint Bob, but it was burst/frozen pipe a year ago that started this process.
It seems trying to get rid of the hassle, is not without hassle of its own.

G

ian-mstm

True... but you're still walking away with $350K... so, better than a poke in the eye with a sharp stick!

Ian

JAJ

In general, you have to genuinely leave CA and establish residence in the other state.
http://www.us.kpmg.com/microsite/tax...0/article7.asp

Obvious question - are you prepared to find new jobs, etc. in a different state?


If you were U.S. citizens and prepared to give up your jobs, and if you wanted to spend time back in the U.K. anyway etc, then it could be work more consideration and you could look further into the U.K. tax issues.

Realistically - if you're Green Card holders, you should probably forget the idea. Unless you're planning to permanently leave the U.S. and lose/renounce your U.S. permanent resident status.

Capital gains tax is a reality. Sorry, that's just the way it is. You are fortunate enough to have purchased into the U.K. housing market at a time when it was competitively priced. As a result, you've made a gain and if you realize it, you will pay tax.

If you had stayed in the U.K. and rented out your house, and now wanted to sell, you would also be facing a significant CGT liability.

MarinBrit

Thanks for your input JAJ,

The plan for the shuffle, is that I'm pitching it to my current employer, as we already have offsite staff, + overseas contractors, so I'm trying to sell it to them as a two years posting back to the UK. I can work from home, plus we have a client base in London I could service from the same time zone.

That minimizes the Job disruption, as I would work for them while in the UK, and resume US employment with them on my return. (the $150K GCT saving being a form of free bonus/golden handcuffs). That's me sorted, my wife can see possibilities.
Two years closer to her mother, and being on Europe's doorstep works for her (We like it here, but limited vacation time is a pain. plenty of opportunity for weekend European City Breaks etc if we knew it was only for two years)

Getting USC would be required to allow exit + return to US. current timescales I've seen put it at ~9 months

The local US property market is (stupid?) expensive. Hence every penny counts.

Cheers.

G

Michael

I suspect one of the biggest problems 3 years from now will be the interest rates. I suspect that home mortgage interest rates will likely be closer to 6% if world economies improve instead of the current approximately 3.5% so it will likely be more difficult to sell in the UK then. Also if you are planning to buy in the US then and need a mortgage, you monthly payments will likely be significantly more.

If world economies don't significantly improve in the next three years, just about every government will likely have a very high debt and central banks probably won't have the ability to print more money. I don't know what the market would be like if that is the case (possibly high interest rates, high inflation and high unemployment or possibly high debt, deflation, and stagnation such as what occurred in Japan during the past 22 years where housing prices continued to drop).

JAJ

You're not going to save anything close to $150k if you have to pay U.K. Capital Gains Tax.
http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm

You still haven't told us what the plan is to keep your Green Card? (unless you intend to become a U.S. citizen first) Do you understand that means you need to (as a minimum) keep a U.S. residence, and that in turn probably means you stay California tax resident, paying CA state tax on your income. You'll end up paying U.K. income tax + CA state tax, since (as far as I know), while the IRS gives credit for foreign taxes, California does not.

Factor in the attorney/CPA fees for professional advice to make sure your "CGT shuffle" strategy doesn't encounter any anti-avoidance provisions that the IRS have thought of (and the strategy to ensure you don't lose your Green Cards, and understand how the new U.K. residence rules affect you), and relocation costs, and you may not have much left from the $150k saving you thought you were going to make.

Added to that, you have put back by many years your acquisition of U.S. citizenship, and probably also put back any loss of U.K. domicile (or re-acquired domicile if you lost it already) and the tax and other costs add up.